Course Work on Company's Finance and Accounting

Interest Income

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In the first year, Maxima Investment Company loaned out $3,000,000 (refer to the balance sheet) to clients at a rate of 4.5 percent each year. This translated to an interest rate income of 135,000 dollars. The amount increases in the second year due to a twofold increase in the amount of money lent out to clients. Since in the first year not all the money was lent out to customers, the business decided to reinvest some of the money in income generating businesses and stocks (assumed rate of return is 3 percent per annum). The amount of interest earned from other incomes reduces year after year because the demand for loans keeps on rising. Also, it reflects the companys efforts to focus on its core business of mortgages rather than investment banking.

Interest Expense

Interest expense due to investors remains at a constant $150,000 (repayment rate of 1.5 percent) because repayments to investors begin after the fifth year. On the other hand, the other interest expenses are payable each year, and the figure reduces each year because the owed amounts also reduce. Other interest costs arise from the likely need to borrow $1,000,000 from other financial institutions at a rate of 2 percent to meet reserve requirements. Borrowing from other commercial entities is costlier than from investors. The net income profit is $115,000

Non-interest incomes

Maxima Investment Company will charge a rate of 0.1% as fees and commissions to process loans and advances. These charges cater for loan assessment expenses such as credit rating analysis and general paperwork. Other fees and commission incomes come from activities such as consultancy, public education, and client follow-ups.

Operation Expenses

Loan loss provision- The assumption is that 1% of the total value of loans issued will not be repaid. Costs from marketing activities are expected to rise as Maxima Investment Company tries to attract more customers. Administrative expenses cater for the hiring of employees, purchase of equipment, and maintenance. The total operating expenses in year one amount to $130,000 which exceeds the operating income by $11,000.

Another assumption within the projected Income Statement is that property and fixtures depreciate at a rate of 10 percent each year. The amount of depreciation decreases as the value of the asset decreases in the subsequent years.

Taxes and Income

In year one, Maxima Investment Company is not eligible for taxation because the company makes losses of $18,600. However, a tax is applicable in the subsequent years at a rate of 39 percent of all pretax earnings. The income margins for Maxima Investment Company rise year on year as more money is disbursed. Even though the profits seem small, it is expected because the company focuses on low-income earners and expenses are high because operations are not yet streamlined.

Balance Sheet Projections

Assets

Out of the $11,000,000 advanced to Maxima Investment Company, $3,000,000 will be held as cash. 2,000,000 will be invested in one-year government bonds and bills. 3,000,000 will be invested in short-term market instruments with a maturity of one year. In the first year, only $3,000,000 will be issued as loans. The primary assumption is that it is impossible to give out all the money as loans in the first year of operations. Also, average returns for the government and stock market instruments is placed at 3 percent per annum. Money cannot be left idle if it can generate income. That is why $5,000,000 is invested in stock market securities and government bonds. The amount of money placed in stock market investments reduces year after year because it is injected into the loan pool to allow Maxima Investment Company to loan out the money.

Further, cash assets are on a decline because more and more money is being loaned out to customers. As the loanable amounts decrease, Maxima Investment Company will seek additional funding in exchange for equity from other investors (year five targets).

$50,000 worth of equipment will be purchased in the first year. The value decreases year after year because of depreciation. Depreciation is also factored in the value of fixtures and fittings whose value decreases from $20,000 in the first year to $16,200 in the final year. Concerning rent, the assumption is that it will increase by $500 each year. Other prepayments include payments for services such as insurance. Intangible assets include proprietary software and patents filed by Maxima Investment Company.

Liabilities

Investor funds is the universal term for all monies received by Maxima Investment Company from MIVs (Microfinance Investment Vehicles), grant agencies, and private investors. This amount is repayable at a rate of 1.5 percent each year. However, payments will begin after the fifth year. As such, the repayment figures have not been factored into the balance sheet. That is why the value remains constant at $10,000,000 for three years. Monies received will not be converted to equity because they mainly come from financing entities. Sale of equity to finance expansion will occur in the fifth year- also not displayed on the balance sheet.

One million dollars will be borrowed to cater for reserve needs and to cushion the company from sudden shocks. This loan will be priced at 2 percent per annum. It will be borrowed from other financial institutions. It costs 0.5 percent more than the investor funds because other commercial entities are also looking to make profits. Other liabilities refer to amounts from overpayments. Total liabilities will decline as the long-term debts are repaid.

Shareholder Funds

Paid up capital refers to the amount of money invested by the proprietors. The initial investment by the founders will be an estimated $100,000. Retained earnings are the sums of money that are not paid to shareholders. Instead, the money is kept for company operations. In the first year, Maxima Investment Company makes no profits. As such, there is a deficit in the retained earnings. Subsequent years show an increase in shareholder funds as the net income increases.

Cash Flow Projections

Operating Activities

A decrease in outflow item is a positive entry since it is considered as in-flow of funds. Account receivables are made up of the sums of money that leave Maxima Investment Company in the form of loans, rent leases, and prepayments. The figures are written as negative because they reduce cash flow standings. The amount reduces year on year because of a reduction in the difference in the amount of money leaving Maxima Investment Company. The difference between year one outflow and year two is $2,998,600 while the difference between year 2 and year three it is $2,001,500. The reduced outflow comes from a corresponding reduction in the amount of money available for lending. The outflow as a result of liabilities reduces from the first year to the second year from $6,000 to 1,200.

Investment Activities

This section analyses cash movement associated with the companies moneys invested in fixed assets as well as financial assets such as investment securities. In the first year, we consider the whole amounts invested in fixed assets and financial assets. In subsequent years, we look at how much extra has been spent on investment activities (or how much less.). Capital expenditures in year one are $76,000 due to the purchase of equipment, fittings, intangible assets, and other assets. Also, in year one Maxima Investment Company Invests $5,000,000 (negative outflow) in government bills and stock market securities. The change to year two is $1,000,000 (positive due to a decline in investments).

Financing Activities

Issued share capital refers to the amount of money invested by the proprietors. It does not change from year one to the subsequent years because of no additional investment. Net borrowings in year one stood at $11,000,000 (inflow). In year two and year three Maxima Investment Company repaid $93,390 and $94,801 respectively (outflow).